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Tranz Rail Restructures Balance Sheet

For Immediate Release
23 July 2002

Tranz Rail Restructures Balance Sheet

Tranz Rail Holdings Ltd confirmed today asset writedowns of between NZ$148 million and $170 million. The writedowns arise from a comprehensive review of the company’s balance sheet in the wake of its major change programme.

Chief financial officer Wayne Collins said Tranz Rail had taken the tough decisions to restructure the company and was now tidying up its balance sheet so the company could start the new financial year with a clean sheet.

“We believe these steps are appropriate and necessary and establish a firm platform from which Tranz Rail can achieve its earnings growth targets over the coming three years.”

Much of the writedowns are associated with the re-engineering of Tranz Rail’s business. Fixed assets were to be written down by NZ$60 million, reflecting Tranz Rail’s move to a smaller fleet and better asset utilisation, which had in turn made some of the company’s equipment obsolete. Similarly, the company had written down some of its IT assets, reflecting the fact that the outsourcing of engineering functions meant there was no ongoing requirement for IT support in this area.

Other writedowns included:

- NZ$16-19 million in the value of inventory. Much of the company’s inventory had been sold to Tranz Rail’s new partners with the outsourcing of its engineering businesses. This had established a market value for such equipment and Tranz Rail had elected to revalue its remaining inventory on this basis.
- NZ$13 million on the value of Tranz Rail’s 24% shareholding in Australian Transport Network (ATN). The investment had been assessed on the basis of latest market information, established with the recent sales of shares in ATN by other parties. While Tranz Rail saw further upside in ATN, and was focused on realising this further value, it had taken the conservative decision to amend the book value of its investment.
- NZ$12 million on goodwill in subsidiary company Tranz Link International, reflecting a lowering of future performance expectations from those envisaged at the time of purchase.
- NZ$15-$25 million on the value of the deferred tax asset. The significant change in ownership of Tranz Rail in recent times means that certain tax losses cannot be carried forward.

Mr Collins confirmed that Tranz Rail would move onto its balance sheet the US$55 million lease on the Aratere interisland ferry. The lease – negotiated with the purchase of the new ferry in 1998 – runs until 2011. With the shift onto balance sheet, there is a need to depreciate the asset. Accordingly, Tranz Rail is writing down the value of the Aratere by NZ$30 million, reflecting three years’ historic depreciation dating back to the time the lease was signed. This will represent a one-off charge to this year’s financial result.

Mr Collins said Tranz Rail had decided, however, that there are no circumstances to necessitate a change in classification of the GATX lease on locomotives and wagons which would therefore remain off-balance sheet. The lease expires in 2008 at which time Tranz Rail can either make a residual payment of US$9.3 million or elect to purchase the leased equipment. Tranz Rail has decided to start accruing for this return payment at the rate of NZ$1.6 million a year. Given this lease is halfway through its life, a one-off charge of NZ$9 million will attach to this year’s result, representing accruals dating back to the negotiation of the lease.

Mr Collins said recent publicity about the way Tranz Rail accounted for its track investment had been reviewed closely and would not change.

“We aren’t afraid of making the tough calls to do the right thing but in the case of track investment, we are completely satisfied that our practices are appropriate.

“Over the past nine years, $187 million of capital investment was made in the track. This work improved the reliability of the track, enabled us to run faster trains or carry heavier loads. Given such investment improved the quality of the track asset, it was rightly treated as capital expenditure.

“Over the same period, around $300 million was spent on more routine maintenance and was therefore treated as an operating expense.”


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